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The Dilemma of Tax Competition: How (not) to attract (Inefficient) Firms?

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  • Diaw, K.
  • Pouyet, J.

    (Tilburg University, Center for Economic Research)

Abstract

We consider a tax competition game between asymmetrically un-informed governments. Two governments simultaneously propose tax arrangements to attract a multinational firm (MNF) which has an ex-ante preference to operate in both countries, and governments anticipate that once the MNF accepts their offer, each host will know the marginal cost of local production, but not the marginal cost in the other country. We show that when the multinational prefers to operate in both countries or not operate at all, then the tax competition game features two equilibria. In one equilibrium, efficient MNFs are attracted in the two countries, while in the other equilibrium, inefficient MNFs are attracted. The equilibrium in which only efficient firms are attracted may occur as the unique outcome if the MNFs can ultimately decide to settle in one country only. Our results suggest that, the existence of (small) countries who are aggressive in attracting MNFs by offering substantial tax advantages allows competing governments to keep inefficient firms away from their territories.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2004-68.

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Date of creation: 2004
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Handle: RePEc:dgr:kubcen:200468

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Web page: http://center.uvt.nl

Related research

Keywords: Common Agency; Adverse Selection; tax competition; Multinationals;

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  1. Roger B. Myerson, 1977. "Incentive Compatability and the Bargaining Problem," Discussion Papers 284, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Ivaldi, M. & Martimort, D., 1992. "Competition Under Nonlinear Pricing," Papers 93.288, Toulouse - GREMAQ.
  3. David Martimort & Lars Stole, 2001. "Contractual Externalities and Common Agency Equilibria," CESifo Working Paper Series 581, CESifo Group Munich.
  4. Trond Olsen & Petter Osmundsen, 2000. "Strategic Tax Competition; Implications of National Ownership," CESifo Working Paper Series 281, CESifo Group Munich.
  5. Bond, E.W. & Gresik & T.A., 1995. "Competition Between Asymmetrically Informed Principals," Papers 11-95-13, Pennsylvania State - Department of Economics.
  6. Thomas A. Gresik, 2001. "The Taxing Task of Taxing Transnationals," Journal of Economic Literature, American Economic Association, vol. 39(3), pages 800-838, September.
  7. Laffont, Jean-Jacques & Pouyet, Jerome, 2004. "The subsidiarity bias in regulation," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 255-283, January.
  8. David MARTIMORT, 1992. "Multi-principaux avec anti-sélection," Annales d'Economie et de Statistique, ENSAE, issue 28, pages 1-37.
  9. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-42, July.
  10. Armstrong, Mark & Rochet, Jean-Charles, 1999. "Multi-dimensional screening:: A user's guide," European Economic Review, Elsevier, vol. 43(4-6), pages 959-979, April.
  11. Laffont, Jean-Jacques & Tirole, Jean, 1991. "Privatization and Incentives," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 84-105, Special I.
  12. Bond, E.W. & Gresik, T.A., 1998. "Incentive Compatible Information Transfer Between Asymmetrically Informed Principals," Papers 8-98-1, Pennsylvania State - Department of Economics.
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Cited by:
  1. Florence Lachet-Touya, 2012. "Les interactions fiscales verticales à la lumière de la théorie des multiprincipaux," Recherches économiques de Louvain, De Boeck Université, vol. 78(1), pages 27-46.

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